Credit CARD Act: Round 2 coming?

Report cites law's gains, but there's 'more work to be done'

The regulation-writing U.S. Consumer Financial Protection Bureau is looking at four "areas of concern" that continue to trouble credit card users, in spite of a landmark consumer protection law passed in 2009.

"The CARD Act brought better protection and fairness to the marketplace, but we found there is more work to be done," CFPB Director Richard Cordray said in a statement released in advance of an agency hearing on credit cards Wednesday in Chicago.

The agency's concerns include:

Add-on products. These include options such as identity theft monitoring and insurance-like programs that suspend your payments if you are ill or out of work. The agency, which has already announced enforcement actions against a number of major card issuers for deceptive marketing, said it "will continue to pursue deceptive practices in the market."

Fee-harvester cards. Although the CARD Act does not restrict fees charged before an account is opened, the bureau will monitor application fees to determine if it should take action under its regulatory rule-making authority. The CARD Act limited fees, other than penalty fees, to 25 percent of the credit limit during the first year after an account is opened.

Deferred-interest cards. Financing programs that delay interest on big-ticket items for a limited time -- called a trap by consumer groups -- will be studied to determine their risks and benefits.

Disclosures. Cardholders may be in the dark about the ins-and-outs of rewards programs, how the grace period on purchases works, and other issues.

The CFPB began a review of the CARD Act in December 2012, seeking input from the public about problems with credit cards. The agency also monitors trends in complaints that it takes directly from the public. If its review finds that card pitfalls are harming consumers, the agency can write regulations under its powerful rulemaking authority, stemming from the Dodd-Frank Act, and issue enforcement actions on card issuers. Alternatively, the agency could recommend that lawmakers address shortcomings in the CARD Act.

Kenneth Clayton, chief counsel for the American Bankers Association, said in a response that while the CARD Act has provided significant benefits for consumers, it has also reduced access to credit for less creditworthy borrowers. "Regulatory limits on banks' ability to manage risk have created a roadblock for people who are new to credit or who have struggled in the past and want a second chance," Clayton said. The agency should be sensitive to such unintended consequences as it considers future regulatory initiatives, he added.

Lauren Saunders, managing attorney of the Washington office of the National Consumer Law Center, said the No. 1 credit card problem was not on the CFPB's list of concerns. "It is still too easy to get way over your head in credit card debt, and too hard to get out of it," she said during the agency's hearing."I think we need a bigger minimum payment, and less marketing to people who are clearly in over their head."

The Credit Card Accountability Responsibility and Disclosure Act was signed in May 2009 and took effect in 2010 and 2011. Its major provisions restricted fees and surprise interest rate hikes, and required lenders to consider card applicants' ability to pay before issuing them credit.

Report finds CARD Act savings
From the end of 2008 through the end of 2012, the cost of using credit cards -- measured as a percentage of average balances -- fell by about 2 percentage points on an annualized basis, the agency said in a report of the law's results that was released with Cordray's remarks. The result indicates a shift away from gotcha-type fees and rate hikes. The law "has impacted the way consumers pay for credit ... and has significantly enhanced transparency for consumers," the agency said.

The bureau's report, based on analysis of de-identified accounts representing 85 percent to 90 percent of total card balances, found that:

Over-limit fees, which averaged $34.80 in 2008, nearly disappeared as a cost to consumers, as the frequency of the fees dropped close to zero. Overall, this saved consumers an estimated $2.5 billion in 2012.

Average late fees dropped from $33.08 in 2008 to $26.84 in 2012. The frequency of late fees fell also -- they now hit 22 percent of all accounts, down from 26 percent in 2008. However, fewer subprime borrowers have cards following the recession, which may reduce the incidence of late fees.

Annual fees rose somewhat, with subprime cards seeing the largest increases. The average rose from $32.48 in 2008 to $34.19 in 2012. The frequency of late fees rose from 3 percent of accounts before CARD Act implementation to 3.75 percent in 2012.

Other fees such as for payment protection, balance transfers and cash advances rose on a per-account basis from $1.35 per quarter in 2008 to $1.75 per quarter in 2012. However, the number of accounts shrunk during this period, driving the per-account average higher.

Interest rates on average account balances rose, climbing from 16.2 percent in early 2009 to 18.5 percent in mid-2010, after the CARD Act's major provisions had taken effect. Subprime borrowers saw the smallest increases.

Access to credit fell in 2008 and 2009, particularly for subprime borrowers, but the impact of the recession is the likely culprit, the study said. In 2009, new account openings for general purpose cards plunged to 43 percent of their pre-recession level, then gradually rebounded, reaching 70 percent of the pre-recession level in 2012. Private label cards saw a less steep decline, and reached 91 percent of their pre-recession level by 2012.

"That credit is less available today than it was in 2007 is hardly surprising," the report concluded.

Published: October 1, 2013

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